Trader Tax Law Update › ... › 09 › TraderTaxLawUpdateTELV… · U.S. futures (regulated...

Trader tax status, tax treatment,

elections, entities, retirement plans,

current developments and tax planning.

For Traders Expo Las Vegas Nov. 2014

12/1/2014 Copyright @ 2014 GreenTraderTax.com 1

Presenter:Robert A. Green CPA

Managing Member

CEO


Agenda Learn how to save thousands with trader tax status and

discover key trader tax strategies and tax elections. Investors have important elections to make, too.

Learn how to qualify for and claim trader tax status for 2014 even after year-end.

There are key tax treatment differences between securities, Section 1256 contracts (futures), all types of options, ETFs, forex, precious metals and more.

Learn how to prepare a 2014 trader tax return with maximum tax benefits.


Agenda Entities are a way to avoid the red flags associated with

Schedule Cs for sole proprietor business traders, and they unlock additional tax breaks.

Learn about the best types of entities and retirement plans for traders.

Accounting software and a smartphone app GTT Tracker is excellent for tracking expenses and time and documenting qualification for trader tax status.


Agenda Current developments including tax reform, tax changes

and court cases.

Specific tax moves upper-income taxpayers should make in 2014 to avoid the ObamaCare 3.8% Medicare tax on unearned (investment) income and income and capital gains tax-rate hikes.

How to execute year-end strategies that are often overlooked.

Obamacare taxes.


Different Types of Traders Casual investor – deals with Form 8949 cost-basis rules.

Active investor – falls short of trader tax status (TTS).

Retail business trader – TTS, Sec. 475, entities, retirement.

Proprietary trader – trades a prop trading firm’s capital.

Investment manager – trades other people’s money.


Trader tax status constitutes business treatment; it unlocks an assortment of meaningful tax benefits for those who qualify.


Trader Tax Status: Benefits Business expenses are far better than investment

expenses.

How to qualify — it’s nuanced and our golden rules help.

Section 475 MTM accounting — elect “tax loss insurance.”

Employee-benefit plans — deduct retirement plans and health insurance premiums.


http://www.greentradertax.com/trader-tax-center/trader-tax-status/business-expenses/

http://www.greentradertax.com/trader-tax-center/trader-tax-status/how-to-qualify/

http://www.greentradertax.com/trader-tax-center/trader-tax-status/section-475-mtm-accounting/

http://www.greentradertax.com/trader-tax-center/trader-tax-status/employee-benefit-plans/

Business Expense Treatment Investment expense treatment is the default method

for investors, but if you qualify for trader tax status, you can use the more favorable business expense treatment.

Business expense treatment under Section 162 gives full ordinary deductions, including home-office, education, Section 195 start-up expenses, margin interest, Section 179 (100%) depreciation, amortization on software, seminars, market data and much more.


Trader Tax Status: How to Qualify Currently, there’s no statutory law with objective tests

for how to qualify for trader tax status (TTS). Subjective case-law applies.

Taxpayers’ trading activity must be substantial, regular, frequent and continuous.

The taxpayer must seek to catch the swings in the daily market movements and profit from these short-term changes rather than profiting from long-term investing.


TTS: Golden Rules Substantial volume: Makes close to 1,000 individual trades

per year on an annualized basis. Count trade confirmations and separate legs of complex option trades.

Substantial proceeds: Has proceeds in the millions of dollars per year on securities; less is okay on options, futures and forex.

Regular: Trades full-time or part-time for a good part of the day, almost every day.

Frequent: Executes trades on more than 75% of available trading days — that’s close to four days per week.


TTS: Golden Rules Continuous: Has few to no sporadic lapses in the

trading business during the year. One month on and one month off is not acceptable.

Time: Spends more than four hours per day, almost every market day working on the trading business.

Daily market movements: Makes mostly day trades or swing trades with average holding periods under a few weeks on equities and no more than 30 days on options.


TTS: Golden Rules Intention: Has the intention to run a business and make a

living. It doesn’t have to be a “primary” living and you can have perennial losses as the hobby-loss rules don’t apply to a trading business.

Business setup: Has significant business equipment (computers and monitors), education, business expenses and a home office.

Materiality: Has a material account size of $25,000 for equities (minimum for pattern day trader status) and over $15,000 for futures, options and forex.


TTS: What Doesn’t Qualify? Automated trading without much involvement by the

trader. Creating your own program qualifies.

Engaging a professional investment manager.

Trading in retirement funds.


Section 475 MTM Accounting Section 475 MTM accounting allows business traders

to deduct trading losses in the current tax year, avoiding capital loss limitations and wash-sale loss treatment (two big problems for securities traders).

When traders have negative taxable income generated from business losses, Section 475 accounting classifies them as unrestricted and unlimited ordinary business losses and net operating losses (NOLs).


Section 475 MTM Accounting Existing taxpayers elect Section 475 by April 15 of the

current tax year (March 15 for S-Corps) by sending an election statement to the IRS.

New taxpayers (i.e., new entities) elect Section 475 within 75 days of inception by internal resolution. If you miss the April 15th election, forming an entity later in the year is wise for electing Section 475.

There are many nuances, and some gambles to the election if you have capital loss carryovers. See our site.


Employee-Benefit Plans Traders with trader tax status may form an entity to

pay compensation to unlock health insurance premium and retirement plan deductions.

Health insurance is 100% deductible against gross income on the owner’s individual tax return.

An employer 401(k) plan has a 100% deductible elective deferral of $17,500 ($5,500 more if over age 50), plus a 25% profit sharing plan.


Which financial products you trade and where you trade them can make a huge difference in tax savings. In this section, we list the various instruments and delve into how they are treated at tax time.


Securities Securities traders need to watch out for higher tax rates,

wash sales, capital-loss limitations and accounting challenges. Securities include:

equities (stocks) equity (stock) options narrow-based indexes (an index made up of nine or fewer

securities) and options on narrow-based indexes exchange-traded funds (ETFs) and options on ETFs taxed as

Registered Investment Corps bonds mutual funds single-stock futures


Section 1256 Contracts Section 1256 contract traders enjoy lower 60/40 tax rates,

summary reporting and no need for accounting. Section 1256 contracts include: U.S. futures (regulated futures contracts) and options on

futures foreign futures with CFTC and IRS approval broad-based indexes and options on broad-based indexes

(a broad-based index is one that is made up of 10 or more securities)

forward forex with the opt out election into Section 1256g(we make a case for spot forex too)

options on commodities/futures ETFs taxed as publicly traded partnerships

other non-equity options


ETFs Selling a security or commodity ETF is treated as sale of a

security.

Exception: Selling a precious metals ETF is treated as sale of precious metals with the “collectibles” long-term capital gains rate of 28% (the normal top rate is 20%).

Commodity ETFs organized as PTPs issue a Schedule K-1 passing through Section 1256 tax treatment.

Adjust cost-basis for pass-through treatment to avoid double-taxation.


ETFs Options on ETFs.

Options on securities ETFs organized as RICs are treated as securities.

Options on commodities ETFs organized as PTPs are treated as Section 1256 contracts.


Options Options cover the gamut of tax treatment. They are a

derivative of their underlying instrument and generally have the same tax treatment.

Equity options are taxed as securities and they include:

stock options

options on narrow-based indices

options on securities ETFs organized as Registered Investment Companies (RICs)


Options Non-equity options are taxed as Section 1256 contracts

and they include:

options on futures

options on broad-based indices

options on commodity ETFs organized as publicly traded partnerships (PTPs)


Forex By default, forex transactions start off receiving

ordinary gain or loss treatment, as dictated by Section 988 (foreign currency transactions).

The good news is Section 988 ordinary losses offset ordinary income in full and are not subject to the dreaded $3,000 capital loss limitation — a welcome relief for many new forex traders who have initial losses.


Forex Tax Elections Section 988 allows investors and business traders to

internally file a contemporaneous “capital gains election” to opt out of Section 988 into capital gain or loss treatment.

The forex capital gains election on forex forwards allows the trader to use Section 1256(g) treatment with lower 60/40 capital gains rates on major currencies only.

We make a case for treating spot like forwards for this more favorable tax treatment.


Other Bitcoin – intangible asset with capital gains

Nadex binary options – swap contracts w/ordinary

Swaps – ordinary treatment

Foreign futures – securities unless IRS ruling for 1256

Precious metals – collectibles rate LTCG 28%

Deposit losses with failed institutions – varies

Visit http://www.greentradertax.com/trader-tax-center/tax-treatment/other/


http://www.greentradertax.com/trader-tax-center/tax-treatment/other/

The IRS hasn’t created specialized tax forms for individual trading businesses. Traders enter gains and losses, portfolio income, business expenses and investment expenses on various forms.


Tax Forms Reporting securities trades is a big challenge on Form 8949

due to IRS cost-basis reporting rules.

Sole proprietor traders report only expenses on Schedule C. Trading gains and losses are reported on other tax forms, depending on the situation: 8949 securities, 4797 Section 475 MTM, 6781 Section 1256 contracts, line 21/1040 Section 988.

In an entity, all trading gains, losses and expenses are consolidated on the entity tax return — a partnership Form 1065 or S-Corp Form 1120-S. An entity looks better.


Forming an entity can save business traders significant taxes.


Entity Solutions With a pass-through entity, business traders solidify

trader tax status, unlock employee-benefit deductions, gain flexibility with a Section 475 election and prevent wash sale losses with individual and IRA accounts.

Conversely, sole proprietor traders can’t have employee-benefit plan deductions.

The entity is simple and inexpensive to set up and operate. Consider our GTT entity formation service.


http://www.greentradertax.com/green-nfh-services/entity-formation/

Entity Solutions Use a pass-through entity that best suits your needs. Taxes

are paid on the owner level.

We like the S-Corp because it pays compensation (officer’s salary) to the owner, which efficiently unlocks health insurance premium and retirement plan contribution deductions.

A partnership return does not work in most cases.

You can form a single-member LLC or multi-member (spousal) LLC. The LLC can elect S-Corp tax treatment within 75 days of inception or by March 15 of the following tax year.


You can trade in the retirement plan, build it up with annual tax-deductible contributions, borrow money from it to start a trading business and convert it to a Roth IRA for permanent tax-free build-up.


Retirement Solutions Retirement contributions require self-employment

income (SEI) or wages. Trading gains and portfolio income are not SEI or compensation. You can overcome this obstacle with a trading business entity paying compensation to the owner/trader.

The best retirement plans for traders are employer 401(k) plans and defined-benefit plans for consistently high-income traders.


Retirement: Employer 401(k) It combines a 100% deductible “elective deferral”

contribution ($17,500 for 2014 and $18,000 for 2015) with a 25% deductible profit-sharing plan contribution. There is also a “catch up provision” ($5,500 for 2014 and $6,000 for 2015) for taxpayers age 50 and over.

Together, the maximum tax-deductible contribution is $52,000 per year and $57,500 including the catch up provision. (This is based on 2014 IRS limits; the 2015 limits are $53,000 and $59,000.)


Retirement: Loans and Roth As a “qualified plan,” an employer 401(k) allows plan

loans, whereas an IRA does not. You can borrow up to the lower of $50,000 or 50% of plan assets. Traders can use this money to finance a trading business.

Consider a Roth IRA conversion to soak up lower tax rates and itemized deductions. Pay taxes now and enjoy permanent tax-free growth in retirement.


Retirement: DOs and DON’Ts Many traders may be triggering IRS excise-tax

penalties for prohibited transactions including self-dealing and/or unrelated business income tax (UBIT) by using their IRAs and other retirement funds to finance their trading activities and alternative investments.

These problematic schemes include investing in MLPs or an IRA-owned LLC. Spot these issues early to avoid “blowing up” your IRA; you don’t want it to become taxable income and have to pay severe penalties.


It’s wise for active traders to use one accounting solution for trading profits and losses and another for expense accounting.


Securities Accounting Expense and general-ledger accounting solutions are not

robust enough to properly account for hundreds or thousands of trades in securities and other financial instruments.

Securities traders need a specialized trade accounting solution like Tradelog, the software we recommend most.

Download your trades from your broker and let Tradelog do most of the job, including wash sales on substantially identical positions across all accounts including IRAs.


http://www.tradelogsoftware.com/greentradertax

GTT Tracker GTT Tracker is a smartphone app and browser-based

single-entry accounting solution.

It downloads, tracks and documents your expenses, including purchases of equipment, furniture, software and other items. Handle depreciation and amortization issues in tax software, like Section 179 depreciation with 100% expensing in the first year.

The GTT TradeCounter plug-in monitors and analyzes your qualification for trader tax status.


http://www.greentradertax.com/trader-tax-center/trader-tax-status/gtt-tracker-with-trade-counter/

Update on trader tax court cases, tax extenders, tax reform, year-end planning, Obamacare taxes and more.


Current Developments The IRS won several trader tax court cases against

options investors. We won several appeals and a small tax court case. Meeting our golden rules for trader tax status is key.

“Tax extenders” lapsed at the end of 2013 and many hope the 2014 or 2015 Congress will renew some or all of them (including R&D, 100% expensing and more). This could slow down tax-filing season.


Tax Reform Consensus is building for limited corporate tax reform

like a deal for repatriation of offshore profits to fund domestic spending on infrastructure.

In my view, corporate tax reform such as reducing the corporate tax rate should only be done with individual tax reform since small business pays taxes on the individual level.


Year-end Tax Planning Defer income to avoid top tax rates and net investment

taxes. Take advantage of tax-loss selling and hold winning positions at year-end.

Accelerate income with a Roth IRA conversion and sell winning positions to utilize lower ordinary and long-term capital gains tax brackets.

Avoid wash sales using Tradelog or convert them into ordinary losses in 2015 with a Section 475 election.


Year-end Tax Planning Qualify for trader tax status to enjoy business expense

treatment, including on purchases before year-end.

Execute employee-benefit plan deductions (health and retirement) with entities on time before year-end.

Get a handle on accounting with Tradelog and GTT Tracker.

Q4 estimates are due Jan. 15, 2015. Prepay state by Dec. 31 if there’s no AMT.


Obamacare Taxes The Obamacare individual health insurance mandate is in

effect for 2014.

Many taxpayers will face confusion over tax penalties, exemptions, premium tax credits, claw backs of subsidies (advanced credits) and extra tax preparation fees on 2014 tax filings.

2014 is the second year for the Net Investment Income Tax.

Learn more about Obamacare taxes on our site.


http://www.greentradertax.com/trader-tax-center/obamacare-mandate-and-net-investment-income-tax/

Contact us at GreenTraderTax.com


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Trader Tax Law Update › ... › 09 › TraderTaxLawUpdateTELV… · U.S. futures (regulated...

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